How the New Tax Law Has Changed Charitable Giving

By Michael Gibney, CFP®, AIF®

Just before the end of 2017, the Trump administration and Congress passed a law commonly known as the Tax Cuts and Jobs Act (TCJA).Although the changes it enacted have been discussed and written about, most of the focus has been on the corporate tax rate cut from 35% to 21% and the reduction of individual tax rates.

Notably, however, many of the changes that will directly affect you and me may not be fully realized until we file our taxes in 2019 for the tax year 2018.Unfortunately, many of the residents in higher tax states like New Jersey, New York and California may be quite surprised at how TCJA impacts their tax return.

The most noteworthy change will require most taxpayers to compare their Itemized Deductions (Schedule A) to the new “Standard Deduction” of $24,000 for a married couple ($12,000 if you are single).Once you calculate your deductions using the new rules, if your itemized deductions are less than $24,000, you will be better off taking the Standard Deduction.

This is because the new tax law reduces or eliminates many of the Schedule A deductions.Most of the press coverage has focused on the “Taxes You Paid” (a.k.a. SALT or State and Local Taxes) section, which has been reduced with a cap of $10,000, but other “Miscellaneous Deductions” such as accountant fees, attorney charges and advisor fees have been eliminated altogether.

Another aspect of the new tax law that has not been widely addressed is charitable donations.While “Gifts to Charity” remain as a viable Schedule A deduction for those who itemize, there may be an impact for those who do not.A number of studies show that most filers will not itemize but rather will use the Standard Deduction.These folks may have less of an incentive to make a donation.Sure, those who give to charities because they have a personal connection will not change their intent, but those who give because there was also a potential to deduct that donation may now think twice.

Hope is not lost!For those clients who are subject to Required Minimum Distributions (RMDs) from their IRAs and/or other retirement accounts, there may be an opportunity to continue to benefit tax-wise from charitable donations by using a strategy called a Qualified Charitable Distribution (or QCD).Although this has been in place for a number of years, the QCD takes a more significant place in planning this year.

As you may know, any funds taken from a retirement account are subject to ordinary Income taxes.This is why, at a certain point, the government forces seniors to take a distribution from any retirement account that was funded with pre-tax dollars.You benefited from the pre-tax contribution - now the IRS wants to collect on this.However, if part of a client’s RMD is sent directly to a charity, then that portion of their distribution is excluded from taxable income and NOT taxed.By way of example, if your RMD is $10,000 for 2018, and you send $3,000 to a charity via a QCD, then you will only be taxed on $7,000.(Note:this is subject to a limit on QCDs of $100,000.)

Bringing this full circle - if you will be filing your taxes using only the standard deduction, then, for the most part, any charitable gift given in 2018 would not receive the benefit of a deduction; however, if you have given the donation via a QCD then you can reduce your taxable income by the amount of the QCD, even if you are taking the standard deduction!Keeping the amount of the QCD off your taxable income may have the additional benefit of reducing the cost or tax impact of other income-related items such as Medicare premiums and the taxation of Social Security benefits.The QCD, by keeping the donated amount off your tax return, can help lower costs or save on taxes.

One impediment to this exercise is that the funds need to be sent to the charity, church or school directly from your retirement account.This usually requires contacting your custodian (such as Schwab, TD Ameritrade or Fidelity) and asking it to facilitate this donation, which is cumbersome.Some custodians have recognized this impediment and have been providing the ability to write a check from your retirement account.This has made the QCD significantly easier to execute.

Please talk to your Wealth Manager at Modera to ask how we can assist in implementing this strategy for you.

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